What does the rise of real estate mean for asset classes?

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While some of the sparkle may have faded, small caps have reigned supreme over the past 12 months

While some of the sparkle may have faded, small caps have reigned supreme over the past 12 months. The Russell 2000 Index (RUT) is up 9.3% in 2021 and 37.2% year-over-year. We discussed in this space last week how ‘memes mania’ has contributed to the breakout, particularly since December 2020. Another chart has surfaced, again from Schaeffer’s senior market strategist, Chris Prybal, who highlights the stranglehold of small caps on Wall Street. But is there a new heavyweight lurking?

The chart below sorts the returns for the past 12 months by asset class. As you can see, RUT has been in the lead all year since December 2020 when the meme stock craze started to gain momentum. However, you can also see that the RUT’s lead decreases, like a launcher running out of gas. After all, the index was down 6.7% this quarter.

Returns of COTW asset classes

Are options traders aware of this? Based on the 10-day buy / sell volume ratio on the iShares Russell 2000 ETF below, it appears to have been. In July, the ratio hit its highest level since February 4 and declined rapidly, an event we explored in more detail last week. Now the ratio appears to be on the rise again, which means traders in the stock markets are getting more daring.

IWM pc ratio August 22

When an entity starts to underperform, it usually means that there is outperforming elsewhere. According to the first chart, the S&P 500 Index (SPX) and real estate jumped to the second and third best performing in July. SPX has always been at the top of the rankings, having never fallen more than fourth in the past 12 months.

But the performance of the real estate asset class in 2021 is a true outsider’s story. After stumbling deeply into negative territory to close out 2020, property yields finally broke through in February and really took off in March. Although there has been stagnation around 30-35% this summer, it is nonetheless an impressive rally. Prybal noted that the last time real estate was the industry leader in 12-month performance was the pre-pandemic fall of October 2019.

If you’ve been following real estate, it’s not much of a surprise. Nationwide home prices rose 17.2% in June 2021 from June 2020, a record high, according to the latest CoreLogic report. While this has been a trend for years, it has undoubtedly been aided and encouraged by the spring rollout of the vaccine and so far undeterred by the summer delta variant. The resurgence makes everyone wonder how long this is going to last. But more importantly, how can a savvy investor benefit from it?

The chart below shows the Real Estate Select Sector SPDR Fund ETF (XLRE) with the SPX. This illustrates the advance of XLRE since the beginning of the year, which could point to a possible exit from real estate on its skis. If you are a savvy contrarian trader looking to dive into real estate, consider lowering your portfolio risk by maintaining options exposure.

newcotwspxchart2

Schaeffer’s subscribers Graph of the week received this comment on Sunday August 22.


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